By Dom Nozzi
September 1, 2019
At the margin (that is, the point at which we are dying of thirst), water is more valuable than diamonds, my professor once said.
But we don’t price it that way.
By underpricing water, we inevitably use too much in arid western states. When water is underpriced, too much is used for low-value uses such as golf course irrigation. In parched Arizona, I recall from college that the majority of water in that state is used for golf courses, and irrigating soft wheat (an ingredient used to make donuts).
I have never forgotten that lesson. Proper price signals — instead of “education campaigns,” which do almost nothing to change behavior – are the only effective way to reduce waste.
How do we send proper price signals? Some utilities, such as in Boulder, discourage excessive water use by increasing the per-gallon cost of water once a household or industry goes above a threshold. For households, that might be something like 1,000 gallons per month, after which the price per gallon goes up substantially. This much more powerfully “educates” people about water waste. Price signals effectively teach people the value of conserving water (or, in the case of the recently adopted sugar tax, to not consume too much sugar).
High water prices for all levels of water use are a meat ax price signal. They do not recognize essential household and industrial water needs. We should, however, be dynamically pricing water to discourage wastefulness, such as extravagant lawn watering.
High prices slow growth, by the way, but water scarcity will not stop growth, despite the dreams of NIMBYs throughout the nation.
We need to nudge people toward water conservation, not prohibit wastefulness (or try to stop growth). Price signals retain the ability to opt for desired water use. That is how it should be.
The failure of Soviet-style economics was based on excessive government market intervention via prohibitions.